No Stop Sign Yet: Inflation Revs Up

By Nell Henderson
Washington Post Staff Writer
Thursday, April 20, 2006

Climbing gasoline prices helped push inflation higher last month, the government reported yesterday, heightening concerns that businesses may be passing more of their energy costs to consumers.

The Labor Department's consumer price index, a widely followed inflation gauge, rose 0.4 percent in March after edging up a mild 0.1 percent the month before. The report caused analysts to reconsider predictions that the Federal Reserve will soon stop raising interest rates to keep inflation under control.

Much of the March increase in the CPI reflected a 3.6 percent jump in gasoline prices.

Gasoline prices have continued to climb this month. The national average price of a gallon of regular was $2.80 yesterday, up from $2.51 a month ago, according to the AAA auto club. Oil prices have risen as well, trading above $72 a barrel yesterday and settling at a record high for the third straight day.

Prices also rose broadly last month for items such as food, housing, clothing, medical care, recreation, transportation, education and communication.

The core CPI, which excludes food and energy prices, rose 0.3 percent in March, its fastest pace in a year, suggesting that more businesses are boosting prices to cover their higher costs of moving goods, paying electricity bills, and heating their stores and offices.

The inflation report signaled "that the long-awaited pass-through of higher costs to a wide range of consumer prices has arrived," wrote Kenneth Beauchemin, an economist at Global Insight Inc., a financial analysis firm.

Stocks rallied Tuesday after a summary of the central bank's last policymaking meeting in March showed that Fed officials believed that they were nearly done raising interest rates, in large part because inflation was so tame. Higher rates make it harder for consumers and businesses to borrow and spend, which slows growth and tamps down inflationary pressures.

Most members of the policymaking Federal Open Market Committee "thought that the end of the tightening process was likely to be near" at the March 27-28 meeting, according to minutes of the session.

Many analysts and investors concluded from the minutes that the Fed would raise its benchmark federal funds rate, the overnight interest rate charged between banks, just one more time, to 5 percent from 4.75 percent at the next FOMC meeting in May, for a 16th consecutive increase since June 2004.

But the committee's March statement was based on the observation that core inflation "was not in the process of moving higher," the minutes said. Indeed, "some meeting participants expressed surprise at how little of the previous rise in energy prices appeared to have passed through into core inflation measures."

FOMC members also said then that they remained concerned that high energy prices might fan core inflation higher. And they emphasized that their decision on when to stop raising interest rates would depend on whether economic growth slows and inflationary pressures ease sufficiently in coming months.

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